Economic Realism

Lars Syll seems to have started a perpetual conversation when he posted a comment about Tony Lawson’s longstanding complaints about realism in economics. I don’t want to get dragged into what appears to be an endless, and pointless, debate … but.

The debate is endless because some economists seem to thrive on endlessness. That is to say they react with horror at closure on any topic. Thus arguments begun in the early 1800’s still roil along happily employing at least a few economists who have specialized in whatever it is that stirred the arguments back then. No one seems inclined to end the discussion, instead it is added to the ever increasing inventory of points-of-view-come- theoretical-stances that clutter economics and make it opaque to all but the most intrepid cognoscenti.

Ah, but there are others who have, in their own minds at least, arrived at closure. And that’s where the pointless part comes in.

You see they achieved closure by departing from reality so it is pointless to argue with them about realism. They don’t care. They really, truly, don’t. On the contrary, they see reality as an obstacle to be overcome. It is a departure from the pristine world they want to create, inhabited as it is by all sorts of inconveniences like human frailty, human foible, and human inconsistency. Those there things – foible, frailty, and inconsistency – are the very devil to model nicely in mathematics, so they have had to be tossed out of the realm of economic theory.

So there appears to be a choice. Either economics has to be bedded in reality and thus be a messy, inconclusive, and always partial pursuit. More art than science. More history and contextual than timeless and law-driven, economics would then never rise above those endless debates. Instead it would be sunk within the constant turmoil of the socio-political realm, buffeted on all sides by contesting ideas, and without any dominant theme to distinguish it from related topics such as business organization, sociology, psychology, and so on. Even its core claim to have a unique view about the allocation of scarce resources within budget constraints could be just as easily the province of applied mathematics rather than the domain of economics.

Well, that’s exactly what happened.

By trying to become a distinct science able to make timeless statements about universal “laws” economics had steadily to strip away all the stuff that kept it stuck in reality. It had to become ever more abstract, not because abstraction allowed the elicitation of great insight, but because it made mathematical modeling more tractable. Economists chose method over reality.

Now, I must give them their due. Their efforts were incredibly successful. The constant striving to achieve greater internal consistency in their model representations of an economy has culminated in an intellectual edifice of epic proportions. Unfortunately of epic and Ptolemaic proportions. We ought not mock the effort simply because of its irrelevance. It surely stands as one of mankind’s greater accomplishments.

Like the cliched boiling frog, economists shed reality only slowly. Each step appeared warranted. Each step promised to bring them closer to the scientific purity they sought. That each step also walked them further from the real world they thought they were studying was never considered a serious problem. After all the prize of being able to describe the vast complexity of the economy in pure mathematical terms was too enticing to resist.

Please recall that this journey into irrelevance began back in the mid 1800’s when the entire intellectual community was abuzz with similar promise. This was before physics came to grips with the quantum. It was before biology fully embraced evolution. It was before sociology was even begun as an enterprise at all. Back then the excitement of being able to cram complicated systems into understandable and manageable packages was irresistible. Economics was no different. The so-called marginal revolution, when economics began its march into modern – modern back then – scientific terms, was a determined effort to end those endless debates. It promised to establish a more mechanical, predictable, and thus more tractable field of study. And it helped set economics apart from politics.

Remember, also, that getting rid of the taint of politics was vital to economists in the wake of the Marxist critique of capitalism. It was both intellectually attractive and ideologically imperative that economics move itself into a domain where it could opine about markets without having to be drawn into discussions about the power relations that inevitably fester wherever political views intrude. And without, incidentally, ever really defining what it meant by a market.

But, of course, humans are inherently political. We were political before we were economical. So to get rid of politics was to get rid of humanity. Economics had to transform itself by squeezing out human beings and inventing for itself all sorts of alternative perspectives in order act as substitutes for the now eliminated humans. Thus it invented its own psychology that eventually became rational choice theory. Humans, when they exchange goods, are making choices. Real humans do this very idiosyncratically. They make mistakes. They miscalculate. They change their minds. They do all sorts of things that throw grit – lots of it – into the workings of economic models. So economists ignored real humans and invented a more compliant rational alternative. With rationality being quaintly defined as doing whatever an economist would do under the same circumstances.

This made life very easy for subsequent economists. It also made their work irrelevant for anyone relying on it for insight into actual exchange.

With this triumph under their belts, economists then moved onto the economy at large. Whereas previously it had been seen as the vast, unkempt, ever changing, and open ended system that it is, it was now closed off. It was sealed up so that nothing could enter and disturb the pursuit of something called equilibrium. Even this wasn’t enough. Time had to be dealt with by truncating and collapsing it into the present. Economists discovered the convenience of discounting the future. To do so they had to ignore uncertainty and pretend that it was only risk. This was seen as small price to pay along the march toward purity.

The elimination of uncertainty and time was a major step forward, but it required a further removal from reality. After all humans have evolved a plethora of skills and attributes to deal with uncertainty. A facile intelligence being one. A willingness to take risk being another. These things had to be cut out. Humans in the monster models that now absorbed the entire attention of economists were already inhuman, now they became “agents”. Or, rather, they became “an agent” because having more than one would make the mathematics too complicated. So the new and improved economics modeled the activity of one, precisely one, so-called “representative” agent whose likes and dislikes were an average of all those humans now sitting outside the model. There was, in other words, no diversity.

Even this was insufficient for some. Having banished diversity amongst agents economists pressed on. they abolished diversity of all kinds. Their models now included only one product, which must be some kind of all purpose Swiss army knife like thing. So the one agent negotiates with one manufacturer over the price of one product. And all the raw materials? Well they melt into the background. The one business employs people – quite how is a mystery given that the economy has only one agent in it – to the exact point at which their [his or her?] worth matches their wage. This is because, as we all know, real businesses have such accurate accounting that they do this all the time. Likewise for capital, which, by the way, is never exactly described because its well known elusive nature in the real world would also mess up the equations.

Phew.

It takes imagination, and enormous intellectual capacity to construct something so far removed from reality. It also takes decades. Generations of economists have worked tirelessly at this project. Modern economics is their monument.

And like many monuments it arouses the curiosity of those unaware of its origins. Those outsiders – people like you and me – are prone to ask questions about such monuments.

Questions like: what was it for? Why did the builders do this? What was their aim?

I am tempted to fall into the trap that seems to grip archeologists whenever they come across an artifact they cannot otherwise explain. They often resort to arguing that the artifact must have had some ritual purpose or content.

And this is how I look at most modern economics. The gulf between it and reality cannot be ignored. That gulf is not a bug of economics it is a feature. It is deliberate. It is there because economists don’t want to engage with reality. They are content with irrelevance. Their goal is not to understand real economies, but to tease yet more insights from the hermetically sealed utopia they have created for themselves. It is a utopia that grips their attention and against whose purity the real world’s great impurity is offensive in its ugliness.

It is a utopia that economists try to press upon the real world in order that their body of knowledge can regain some semblance of relevance. That is why some of them advocate changing the real world to conform to the strictures of their models. It is also why some of them suspend their own life experiences whenever they theorize inside the ritualistic walls of their academic domain. That the reality they inhabit conflicts so sharply with that of their intellectual inner sanctum, that the dichotomy is so stark, appears not to concern them.

This is the nub of the problem: by being so able to separate and ignore their own lives, their own frailties, foibles, and inconsistencies as they act out their professional roles, economists display all the outward signs of being zealots of a cult rather than the keepers of a store of knowledge about our world.

That makes them dangerous.

And it makes the entire discussion about reality and economics moot.

The two don’t intersect.

But don’t get me started. I am likely to rant all day about it. Besides, it’s pointless.